A new set of factors is driving consolidation activity among healthcare organizations. Can these combinations create value?
Earlier this year, a report by Fitch Ratings commented on the steady increase of hospital consolidation activity since 2009, noting that 2011 and 2012 saw “the highest number of mergers and acquisitions transactions since 2000” (Nonprofit Hospital Consolidation, Integration and Alignment, Jan. 24, 2013). The report also described a new set of factors driving consolidation in the wake of the Affordable Care Act (ACA). Whereas pre-ACA consolidation was driven by such factors as the desire to increase market share, improve negotiating leverage, and enhance physician alignment, post-ACA consolidation is driven by the need to develop data warehouses and analytics, the transition from payment for volume to payment for value (which require significant improvements in care coordination), changing clinical practice patterns, and the movement toward population management.
Research from HFMA’s Value Project identified several other factors that cross over the pre-ACA and post-ACA eras. These include the need to achieve greater economies of scale in the face of declining payment and capital needs resulting from the implementation of IT infrastructure.
Consolidation of healthcare provider organizations is being viewed warily by other stakeholders. A report last fall from Catalyst for Payment Reform, a California-based not-for-profit representing large employers and other healthcare purchasers, described consolidation as a “major driver” of healthcare costs (Provider Market Power in the U.S. Health Care Industry: Assessing Its Impact and Looking Ahead, Nov. 2012). America’s Health Insurance Plans (AHIP) echoed this view in comments made in conjunction with the release of a report by AHIP staff members arguing that hospital price increases were a significant factor behind insurance premium increases from 2008-2010. On the regulatory side, the Federal Trade Commission (FTC) and Department of Justice (DOJ) are straddling the fence between antitrust enforcement actions, which seem to have taken on new vigor, and antitrust “safety zones” for accountable care organizations (ACOs) being formed pursuant to the ACA under the Medicare Shared Savings Program, overseen by the Centers for Medicare & Medicaid Services.
The ambivalence of the FTC and DOJ’s approach captures the tension implicit in the shift between pre- and post-ACA consolidation activity described in the Fitch report. Looking back, negotiating leverage was a driver of consolidation on both the payer and provider side. But analyses of impacts from past mergers—fixated on the price advantage secured by one side or the other—are subject to several limitations. If prices are defined as charges, they may bear little relationship to negotiated rates or actual payments for care. Past consolidations often involved the acquisition of a financially stressed organization by a more financially stable organization; price increases at the acquired organization may have been a prerequisite to putting it on a stronger financial footing.
On the flip side, the ability of a dominant payer to drive down hospital prices does not take into account the impact of reduced payment on the hospital’s ability to provide services or invest in new technology or infrastructure. As the authors of a recent review of the literature on healthcare consolidation note, “This approach fails to address the fundamental financial realities faced by hospitals and so is unlikely to ultimately increase consumer welfare. Insurance companies may benefit from lower reimbursement, but consumers—and disproportionately, those underserved consumers who rely most heavily on the charitable services of hospitals—will suffer the consequences of scaled back services and overall lower quality of care” (Balto, D.A., and Kovacs, J., Consolidation in Health Care Markets: A Review of the Literature, submitted to and supported by the Robert Wood Johnson Foundation, January 2013).
Concerns over the impact of past provider consolidations on price also may be overblown. A 2010 report from the Institute of Medicine (IOM) stated that of an estimated $765 billion in annual waste in the nation’s healthcare services, the lion’s share is the result of unnecessary services ($210 billion), excess administrative costs ($190 billion), and inefficiently delivered services ($130 billion)—the products of fee-for-service payment and a fragmented care delivery system. In comparison, the potential cost impacts of consolidation were small. The same IOM report estimated that in the 94 metropolitan statistical areas that met two criteria—consolidated hospital ownership and a population large enough to support multiple independent hospitals—unwinding mergers would save no more than $10 billion to $12 billion a year in total national healthcare expenditures. Unwinding these mergers would come at considerable expense, in the face of an important caveat that the report’s analysis “does not indicate that any specific hospital consolidation is (or is not) likely to result in higher or lower prices” (Capps, C.S., “Price Implications of Hospital Consolidation,” The Healthcare Imperative: Lowering Costs and Improving Outcomes, IOM, 2010).
Looking back, the impacts of consolidation are contested, focused on struggles for pricing power. Looking forward, one sees the imperatives of healthcare reform and the ACA. The needs for better coordination of care, enhanced data-sharing, improved economies of scale, and the ability to shift care to locations that produce the best outcomes at the lowest price are real. And in reality, fulfilling these needs will require greater collaboration—and likely, new forms of consolidation—among healthcare organizations. It also will require a movement beyond the sometimes acrimonious “who’s to blame” debates of the past.
The creation of value to the purchaser—through higher quality outcomes or reduced total costs of care—will require greater coordination and collaboration among hospitals, physicians, and payers alike (not to mention the patients). Already, commercial payers are combining with hospitals and physician groups to create ACOs, bundled episodes of care, and other models that require a consolidated approach to care delivery with shared risks and rewards. If the factors driving these new forms of consolidation have changed, the results might as well. A dose of skepticism informed by the past is always healthy, but so too is an openness to future innovations.
James H. Landman, JD, PhD, is director, thought leadership initiatives, HFMA, Westchester, Ill.
Publication Date: Wednesday, May 01, 2013